AAPL, TWTR, BABA – Mixed Bag

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Apple in line, Twitter miss and Alibaba beat.

• Apple reported a steady quarter while Twitter’s problems remain unresolved and Alibaba used mobile to defy the slowing Chinese economy.

Apple

• Apple reported a steady quarter and set itself up for a good holiday quarter despite troubling rumblings from its supply chain.
• Fiscal Q4 15A revenues / EPS were $51.5bn / $1.96, very slightly ahead of consensus at $51.0bn / $1.88.
• 48m iPhones (48m consensus), 9.9m iPads (10m) and 5.7m Macs (5.6m) shipped and it was mainly the strength of iPhone ASPs revenues were able to beat expectations.
• As a result of better prices, gross margins were also strong coming at 39.9% compared to consensus of 39.3% and guidance of 38.5% – 39.5%.
• Apple Watch saw a sequential increase in shipments which leads me to think that shipments were around 3.8m units.
• A sequential increase is good news as this sets a floor for volumes, but it is way below what the bulls were forecasting prior to the device’s launch.
• China remained Apple’s strongest market with revenues doubling YoY, 25 stores and a healthy outlook.
• Apple remains the only non-Chinese ecosystem to have any real traction in this market.
• Guidance for fiscal Q1 16E was $75.5bn – $77.5bn with the midpoint at $76.5bn slightly below consensus at $77.0bn.
• Competition has weakened over the last 2 quarters and so I think that Apple is very unlikely to miss expectations in January 2016.
• However, I don’t think it will beat either meaning that the shares are unlikely to have a strong rally leaving Apple as a good place to park capital but not one that one would consider for outperformance.

Twitter

• The gloss of Jack Dorsey’s appointment as CEO was well and truly tarnished by yet another quarter clearly showing that Twitter has ground to a halt.
• Q3 15A revenues / adj-EPS was $569m / $0.10 ahead of consensus at $559m / $0.05 but the story remained user growth and guidance.
• MaUs grew by 1% QoQ to 320m below consensus of 324m as it is clear that Twitter continues fail in moving away from just being a news dissemination system.
• Twitter has adopted video in a similar manner to Facebook, but it has yet to see video drive a meaningful improvement in overall user engagement.
• In order to begin growing once again, Twitter must break-out of its mould and begin addressing the other activities that users enjoy on smartphones and tablets.
• Its segment represents just 16% of the time spent on a mobile device and consequently its ability to monetise is fundamentally limited.
• This fact was inherent in Q4 15E guidance where revenues are expected to be $695m-$710m missing consensus of $741m by 5%.
• The problem is that its current strategy remains to improve on what it has rather than to take the company in a bold new direction.
• A bold new direction requires a dedicated, focused and highly engaged leader which Twitter simply does not have.
• Instead Jack Dorsey has to spend a good portion of his time running Square and bringing this company to IPO.
• Hence, I see no bold moves and suspect that the current strategy will deliver marginal improvements at best.
• I see further disappointments ahead and think that the shares will continue to fall.

Alibaba

• Alibaba reported good fiscal Q2 16A results as growth in transactions from mobile devices helped offset the overall drag from the slowing Chinese economy.
• Q2 16A revenues / EPS were RMB22.1bn / RMB3.63 compared to consensus at RMB21.3bn / RMB3.45 triggering a small relief rally in the shares which have been pummelled by the broader sell-off in China.
• Total transaction volume (GMV) was up 28% to RMB713bn ($112bn) and was mostly driven by the increase in user numbers which grew to 386m of which 346m were on mobile and responsible for 62% of GMV.
• Cash flow from operations was RMB15.1bn (US$2.3bn) leaving the cash balance at a very healthy $16.7bn.
• I believe that this is of paramount importance as the next stage of Alibaba’s growth is going to require meaningful investment.
• Alibaba has built a strong base of mobile users and the next stage of its evolution is to expand the services that it offers to those users such that they increasingly engage with Alibaba.
• It is from this increasing engagement that long term revenue growth is likely to be derived as the e-commerce business is now so large that it will be difficult to maintain the current rate of expansion.
• This is where the O2O (online to offline) strategy (see here) and Digital Life services come into play, all of which Alibaba is aggressively expanding.
• In this space Baidu, Tencent, Xiaomi and China Mobile are also all vying to take a leadership position.
• The problem is that RFM estimates that the Chinese market is large enough for three to be very successful.
• This means that two will fall by the wayside but with its current size and resources, Alibaba is unlikely to be one of them.